By now, employers should have received disclosures about fees paid to their 401(k) and pension plans’ covered service providers.  In a prior First Alert, we explained why employers needed to be proactive in seeking these disclosures and reviewing the fees for reasonableness.  Here, we discuss the next step for compliance with the plan service provider fee regulations:  disclosure of this information to participants in defined contribution plans allowing self-directed investments.

Plan Administrators Must Make Regular and Periodic Disclosures

If a 401(k) or other defined contribution plan provides plan participants with the right to direct the investment of their accounts, the new fee and expense disclosure regulations require plan administrators to periodically provide participants and beneficiaries with sufficient information regarding their rights under the plan, the designated investment alternatives and related fees to make informed decisions with regard to the management of their accounts.

Plan Administrators Must Act Reasonably and In Good Faith

As a practical matter, plan administrators (or their third-party service providers) may largely serve as conduits between third-party service providers or issuers of designated investment alternatives and plan participants. Plan administrators can avoid regulatory sanctions relating to the completeness or accuracy of information received from these sources, but only if their reliance on this information is reasonable and in good faith.  Plan administrators cannot simply pass the information on to participants and later plead ignorance about the accuracy of that information.  The proverbial “pure heart, empty head” approach is not enough.

Types of Information to be Disclosed

The required disclosures fall into two categories:  plan-related information and investment-related information.

The plan-related information includes:

  • General information regarding investment rights and options (e.g., how to give investment instructions and a list of the designated investment alternatives.
  • Plan-wide administrative expenses (i.e., fees for general administrative services such as recordkeeping which are charged against participant accounts on a plan-wide basis and how they are allocated).
  • Individual expenses (i.e., charges against participant accounts on an individual basis, such as for plan loans or QDROs for the participant). 

In addition, the actual amount of fees deducted directly from each participant’s account must be reflected on the participant’s quarterly account statement.

The investment-related information disclosure requirements apply to each designated investment alternative. While too numerous to list in detail here, key elements include information regarding the performance of the investment alternatives over one-, five- and 10-year periods versus appropriate broad-based security market indices, and each alternative’s total annual operating expenses.  Most items must be disclosed automatically in a chart designed to facilitate a comparison for each designated investment alternative.  Materials relating to voting, tender and similar rights that are passed through to participants must be furnished when received.  Other items (including updated performance information) must be provided on a website and certain other items need only be provided upon request.

Timing of Disclosures

Plan-related and automatic investment-related disclosures generally must be disclosed on or before the date on which a participant or beneficiary can first direct the investment of his accounts and at least annually thereafter.  For calendar year plans, plan administrators must provide the initial annual disclosures by August 30, 2012, and the initial quarterly disclosures by November 14, 2012.

For plan-related disclosures, any change to the general operational and identification information must be disclosed between 30 and 90 days before the effective date of the change.  As noted above, the administrative and individual expense information must be supplemented quarterly by individualized statements of the fees and expenses which were actually charged in the prior quarter.

Next Steps

Often, the plan’s record keeper will prepare a draft of the annual disclosures.  Employers should review them carefully for accuracy and completeness.  Common issues we have seen include whether the benchmarks used are sufficiently broad-based and appropriate for the funds involved, and whether all the administrative and individual-level fees are accurately described. If the regulations are not satisfied, the plan administrator may be viewed as breaching its fiduciary duties and plan fiduciaries may become responsible for the results of participant investment elections. 

Employers also would be well-advised to use the process of preparing the fee and investment disclosures as an opportunity to review investment performance, fee levels, the extent to which fees are directly or indirectly borne by participants, and how such fees are allocated.

Note on Self-Directed Brokerage Accounts

Finally, the Department of Labor caused quite a stir in its response to a frequently asked question about the participant fee disclosure rules.  The response indicated that plans should have a “manageable number of investment alternatives,” and that plan fiduciaries may have a duty to provide fee and investment disclosures with respect to certain investment options provided through self-directed brokerage accounts or mutual fund windows.  After a backlash from employers and the employee benefit community, the DOL removed the response and added another question and answer on the same topic.  While the new question and answer omitted the suggestion that plans should have a manageable number of investment alternatives and may be required to provide disclosures regarding funds within self-directed brokerage accounts or mutual fund windows, it left open the door to further regulation in this area.